KARACHI: Mothers in many middle-class households sit their children down after Eid and collect all the Eidi they’ve amassed during the annual festival. Some kids hand it over silently as they understand their parents’ financial constraints. Others express reluctance and only grudgingly agree to surrender their dough. Mothers then plough the money back into household budgets to reduce the mismatch between incomes and expenses. The cycle repeats itself every year.
Something similar happens during the annual national budget-making exercise. The federal government is always in deficit. It’s under pressure, especially during an International Monetary Fund (IMF) programme, to reduce the gap between its revenue and expenditure. Thanks to statistical sleight of hand involving provincial budget surpluses, Islamabad brings down the deficit number every year to placate the IMF.
How does that work? You add all sorts of federal revenues and then subtract total expenditures as well as transfers to the provinces to get the deficit figure. But that’ll get you the federal budget deficit, not the “overall budget deficit”. The latter is a more favourable number for Islamabad because it reduces the gap between its earnings and spending.
The federal government asks the provinces every year to run budget surpluses. In other words, it wants the provinces to keep their funds unspent so that the same can be adjusted against its own losses. Islamabad wants the provinces to go without lunch because it likes to have ice cream for dessert.
The 2021-22 budget documents show the difference between the federal and overall budget deficits is Rs570 billion, up 135pc from a year ago. That’s Rs570bn the provinces will have but won’t spend. That’s almost 84pc of the budgeted federal subsidies of Rs682bn for the same year.
So the question arises: why do the provincial governments oblige their federal counterpart and produce surpluses? An economist who has previously worked for the government believes the provinces “can’t be defiant openly”. They can publicly protest, they can write open letters to the prime minister, but they can’t declare open season on Islamabad.
Moreover, pleasing the IMF may be at the bottom of their priority lists, but they’re all beholden to the World Bank, another institution in the United Nations system that’s been too generous to the provincial governments.
According to a seasoned technocrat, the federal government also props up its fiscal books by withholding fund transfers to the provinces meant for the last month of every fiscal year. The same funds are then shown as provincial surpluses in the budget.
The provinces also often end up with unspent funds in their coffers because their planning and development departments have low absorption capacity. They can’t execute multiple big projects at the same time. Their inability to spend money only makes it easier for Islamabad to squeeze surpluses from them every year.
Published in Dawn, June 12th, 2021